Financial Institutions-- Ch. 17, 18, 19

Deposit insurance has a limit of: a. $10,000. b. $25,000. c. $100,000. d. $250,000.

250,000

A bank that holds a greater percentage of traditional demand deposits and loans will likely incur ______ non-interest expenses and have a ______ net interest margin than other banks of the same size (assuming that its loan losses are no higher than those at other banks). A) greater; higher B) greater; lower C) less; higher D) less; lower

A

A bank's net interest margin will likely decline if it has a large amount of A) rate-sensitive assets and no rate-sensitive liabilities. B) rate-sensitive liabilities and no rate-sensitive assets. C) loans to technology firms. D) real estate loans.

A

As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a _________ proportion of loans while achieving ________ profitability. A) higher; higher B) lower; lower C) higher; lower D) lower; higher

A

Assume a bank accepts deposits on Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank's profit margin? A) the A$ appreciates against the pound B) the A$ is stable against the pound C) the A$ depreciates against the pound D) the British interest rates increase E) C and D

A

Banks can increase their potential interest revenues by restructuring their asset portfolio to contain less ______ and more ______. A) Treasury bonds; commercial loans B) Treasury bonds; excess reserves C) consumer loans; Treasury bills D) none of the above

A

Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Durango's gap ratio is ____________. A) 1.5 B) 0.67 C) $1 million E) none of the above

A

Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap. A) True B) False

A

Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affected by interest rate fluctuations. A) True B) False

A

If a bank sells CD futures, it ______ of rising interest rates and ______ of declining interest rates on its interest expenses. A) reduces the potential adverse effect; reduces the potential favorable effect B) increases the potential adverse effect; increases the potential favorable effect C) decreases the potential adverse effect; increases the potential favorable effect D) increases the potential adverse effect; decreases the potential favorable effect

A

If the currency mix of a bank's assets is similar to that of its liabilities and the overall rate sensitivity of its assets and liabilities is similar, interest rate risk is completely nonexistent. A) True B) False

A

In an interest rate swap, a bank whose liabilities are ____________ rate sensitive than its assets can swap payments with a ____________ interest rate in exchange for payments with a ______________ interest rate. A) more; fixed; variable B) more; variable; fixed C) less; fixed; variable D) less; fixed; fixed E) none of the above

A

Most loan sales enable the bank originating the loan to continue servicing the loan. A) True B) False

A

Other things being equal assets with ____________ maturities and _______ frequent coupon payments have shorter durations. A) shorter; more B) shorter; less C) longer; more D) longer; less

A

Parsons Bank reported $3 million in interest revenues and $1 million in interest expenses. Parsons has $20 million in assets and $8 million in liabilities. Parsons net interest margin is _____ percent. A) 10 B) -10 C) 35 D) 25 E) none of the above

A

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's gap is $_________. A) -300 million B) 300 million C) -500 million D) 500 million

A

The greater the ______, the greater the amount of assets per dollar worth of equity. A) leverage measure B) ratio of equity to debt C) capital ratio D) proportion of loans to securities in the asset portfolio

A

The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called A) gap measurement. B) duration measurement. C) duration ratio. D) gap ratio.

A

The risk of a loss due to closing out a transaction is referred to as _________________ risk. A) settlement B) credit C) interest rate D) exchange rate E) none of the above

A

____________ is not a method used to assess interest rate risk. A) Efficiency analysis B) Gap analysis C) Duration analysis D) Regression analysis

A

The ____ is the fund used to cover insured depositors. a. Bank Insurance Fund b. Federal Deposit Insurance Corporation (FDIC) c. money market mutual fund d. growth fund e. none of the above

Bank insurance fund

Commercial banks are not allowed to invest in a. Treasury securities. b. Freddie Mac securities. c. Fannie Mae securities. d. Banks can invest in all securities mentioned above.

Banks can invest in all securities mentioned above

When banks need funding for just a few days, they would most likely a. issue bonds and then call them. b. issue stock and then repurchase it. c. borrow in the federal funds market. d. issue NCDs.

Borrow in the federal funds market

A gap ratio of less than one suggests that A) rate-sensitive assets exceed rate-sensitive liabilities. B) an increase in interest rates would increase the bank's net interest margin. C) rate-sensitive liabilities exceed rate-sensitive assets. D) a decrease in interest rates would decrease the bank's net interest margin. E) B and D

C

A typical bank will attempt to earn a A) maximum return and maintain credit risk at a high level. B) maximum return and maintain credit risk at a low level. C) reasonable return and maintain credit risk at a tolerable level. D) very safe return and maintain credit risk at a high level.

C

Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is A) $1 million. B) -$1 million. C) -5 percent. D) 5 percent.

C

Banks can increase their liquidity position by restructuring their asset portfolio to contain less ______ and more ______. A) excess reserves; Treasury bills B) Treasury bonds; corporate bonds C) loans; Treasury bills D) none of the above

C

Because riskier assets offer ____________ returns, a bank's strategy to increase its return will typically entail a(n) ______________ in the overall credit risk of its asset portfolio. A) lower; increase B) lower; decrease C) higher; increase D) higher; decrease E) none of the above

C

For most banks, the average duration of assets _________ the average duration of liabilities, so the duration gap is __________. A) exceeds; zero B) exceeds; negative C) exceeds; positive D) is less than; negative

C

If a bank expects interest rates to consistently _____________ over time, it will consider allocating most of its funds to rate-_______________ assets. A) decrease; sensitive B) increase; insensitive C) increase; sensitive D) Answers a and b are correct. E) none of the above

C

If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if the A) currency mix of assets is similar to that of liabilities. B) overall rate-sensitivity of assets and liabilities are similar. C) rate sensitivity of assets and liabilities is matched for each currency. D) A and B

C

In a regression of a bank's stock return on an interest rate proxy and market returns, a ____________ coefficient for the interest rate variable suggests that bank performance is _____________ affected by ___________ interest rates. A) positive; adversely; rising B) positive; favorably; declining C) negative; adversely; rising D) negative; favorably; rising E) none of the above

C

ROE is defined as A) Net profit after taxes x (Assets/Equity) B) (Net profit after taxes/Assets)x Equity C) (Net profit after taxes/Assets)x (Assets/Equity) D) Net profit after taxes x (Equity/Assets)

C

Research on bank mergers has generally found that the acquiring bank's stock price __________ at the time of the acquisition. A) rises moderately B) rises substantially C) declines or remains unchanged D) all of the above occur with equal frequency

C

Which type of savings account transfers funds to a checking account when checks are written? a. ATS b. passbook savings c. CDs d. MMDAs

ATS

Money market deposit accounts (MMDAs) a. require a maturity of 6 months or longer. b. allow a limited number of checks to be written against the account. c. pay a higher interest rate than CDs. d. none of the above

Allow a limited number of checks to be written against the account.

A bank can usually simultaneously maximize its return on assets and minimize credit risk. A) True B) False

B

A bank's net interest margin is commonly defined as A) interest revenues minus interest expenses. B) (interest revenues minus interest expenses)/total assets. C) (interest revenues minus interest expenses)/total liabilities. D) (interest revenues minus interest expenses)/capital.

B

A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets. A) True B) False

B

Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand. A) True B) False

B

Banks can reduce their required capital levels by A) increasing their loans. B) reducing their loans. C) increasing their dividends. D) obtaining more deposits.

B

Banks tend to focus their loans in one industry so that they can specialize on one industry and reduce the credit risk of their loan portfolio. A) True B) False

B

During a period of rising interest rates, a bank's net interest margin will likely ______ if its liabilities are ______ its assets. A) increase; more rate-sensitive than B) decrease; more rate-sensitive than C) increase; equally rate-sensitive as D) decrease; equally rate-sensitive as

B

Floating-rate loans completely eliminate interest rate risk. A) True B) False

B

For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is A) zero. B) positive. C) negative. D) B or C

B

For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive. A) True B) False

B

If a bank desired to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ______ and use most of its funds for ______ (assuming that all loans will be repaid). A) traditional demand deposits; commercial loans B) traditional demand deposits; consumer loans C) NOW accounts; consumer loans D) NOW accounts; commercial loans

B

If a bank expected interest rates to consistently ___________ over time, it will consider allocating most funds to rate-__________ assets. A) decrease; sensitive B) decrease; insensitive C) increase; insensitive D) none of the above

B

If a bank has a ______________ duration gap, its average asset duration is probably ________________ than its liability duration. A) negative; smaller B) positive; larger C) negative; larger D) none of the above

B

If a bank obtains a relatively large portion of its funds from conventional demand deposits, interest expenses should be relatively ________, while its noninterest expenses should be relatively ______. A) high; low B) low; high C) high; high D) low; low E) none of the above

B

If interest rates ____________, banks with ____________ duration gaps will be ________________ affected. A) rise; positive; positively B) rise; positive; adversely C) decrease; positive; adversely D) decrease; negative; positively E) none of the above

B

In general, the duration of zero-coupon securities with short maturities is _____ than the duration of zero-coupon securities with long maturities. A) higher than B) lower than C) equal to D) A or B, depending on the issuer of the securities

B

International diversification of loans can best reduce the bank's overall default risk if A) the countries where loans are given are clustered together in a single continent. B) the countries where loans are given have economic cycles that do not move together over time. C) A and B D) none of the above

B

Other things equal, assets with shorter maturities have ______ durations. Assets that generate more frequent coupon payments have ______ durations. A) shorter; longer B) shorter; shorter C) longer; shorter D) longer; longer

B

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's gap ratio is _________ percent. A) 37.5 B) 50.0 C) 100.0 D) 40.0

B

Ringo Bank has a profit after taxes of $1.5 million, total assets of $50 million, and shareholder's equity of $30 million. Ringo's return on equity (ROE) is _________ percent. A) 1.8 B) 5.0 C) 3.0 D) 1.5 E) none of the above

B

Ringo Bank has a profit after taxes of $1.5 million, total assets of $50 million, and shareholder's equity of $30 million. Ringo's return on equity (ROE) is _________ percent. A) 1.8 B) 5.0 C) 3.0 D) none of the above

B

The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks. A) True B) False

B

The __________ of CD futures ________ the potential adverse effect of rising interest rates on a bank's interest expenses. A) sale; increases B) sale; reduces C) purchase; reduces D) both A and C are correct

B

The duration of zero-coupon bonds will be _____ the duration of coupon bonds with the same maturity. A) lower than B) higher than C) the same as D) A or B, depending on the size of the coupon payment

B

The risk of a loss due to closing out a transaction is referred to as _________________ risk. A) credit B) settlement C) interest rate D) exchange rate E) none of the above

B

When cash outflows temporarily exceed cash inflows, banks are most likely to experience A) higher dividend payments. B) illiquidity. C) a negative duration on its assets. D) an excess of capital.

B

Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market. A) True B) False

B

Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk? A) one whose assets and liabilities are equally interest-rate sensitive B) one whose assets are more interest-rate sensitive than its liabilities C) one whose liabilities are more interest-rate sensitive than its assets D) one whose gap ratio is equal to 1.0

B

Which of the following is not a likely method used by a bank to reduce interest rate risk? A) maturity matching B) using fixed-rate loans C) using interest rate futures contracts D) using interest rate caps

B

Which of the following statements is incorrect? A) Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests. B) The compensation of bank loan officers may be tied to loan volume, which encourages a loan department to extend loans with a very high concern for risk. C) To prevent agency problems, some banks provide stock as compensation to managers. D) The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders.

B

____________ is not a method used to assess interest rate risk. A) Gap analysis B) Ratio analysis C) Duration analysis D) Regression analysis E) All of the above are methods to assess interest rate risk.

B

Bank A has a 10 percent capital ratio and uses a significant proportion of its assets to invest in very highly-rated bonds. Bank B has an 12 percent capital ratio and uses a significant proportion of its assets to invest in highly leveraged transactions. How would Bank A rate versus Bank B using the capital and asset quality criteria? a. Bank A is perceived as safer by both criteria. b. Bank B is perceived as safer by both criteria. c. Bank A is perceived as safer according to capital, but more risky according to asset quality. d. Bank B is perceived as safer according to capital, but more risky according to asset quality.

Bank b is perceived as safer according to capital, but more risky according to asset quality

The performance of a bank that continually concentrates in short-term deposits in euros and adjustable-rate dollar loans with equal rate-sensitivity is A) unaffected if European interest rates increase and U.S. rates decrease. B) unaffected if U.S. interest rates increase and European interest rates decrease. C) adversely affected if European interest rates increase and U.S. rates decrease. D) adversely affected if U.S. interest rates increase and European rates decrease. E) A and B

C

_____________ is (are) least likely to be used as a method of reducing interest rate risk. A) Maturity matching B) Floating-rate loans C) Stock options D) Interest rate swaps E) Interest rate caps

C

_____________ is (are) least likely to be used as a method of reducing interest rate risk. A) Maturity matching B) Using floating-rate loans C) Stock options D) Using interest rate swaps E) Using interest rate caps

C

Which of the following statements is incorrect? a. Banks have expanded their business across services over time. b. Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale. c. The banking industry has become less concentrated in recent years. d. All of the statements above are correct.

C: The banking industry has become less concentrated in recent years.

The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity. a. substantially above b. substantially below c. close to d. none of the above; the rate is much higher than the Treasury yield in some periods, and much lower than the Treasury yield in other periods

Close to

A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity? A) 10 percent B) .2 percent C) 2 percent D) 20 percent E) none of the above

D

A common method for banks to reduce their default risk is to A) specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness. B) specialize in loans of companies whose earnings patterns are quite similar over time. C) A and B D) none of the above

D

Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is A) $1 million. B) -1 million. C) 5 percent. D) -5 percent.

D

Banks can reduce their default risk by restructuring their asset portfolio to contain less ______ and more ______. A) Treasury bonds; corporate bonds B) Treasury bonds; municipal bonds C) Treasury bonds; commercial loans D) none of the above

D

Banks generally ________ loans and ___________ their purchases of low-risk securities when the economy is weak. A) increase; increase B) reduce; reduce C) increase; reduce D) reduce; increase

D

Banks would reduce their liquidity position by restructuring their asset portfolio to contain less ______ and more ______. A) Treasury securities; excess reserves B) loans; Treasury securities C) corporate bonds; Treasury securities D) none of the above

D

Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Durango's gap is ___________, and Durango is probably more concerned about a(n) ____________ in interest rates. A) -$1 million; increase B) -$1 million; decrease C) $1 million; increase D) $1 million; decrease E) none of the above

D

If Bank A has a negative gap and Bank B has a positive gap. Which of the following is true? A) Bank A is more favorably affected by rising interest rates. B) Bank B is more favorably affected by falling interest rates. C) Bank A is adversely affected by falling interest rates. D) none of the above

D

If a bank that relies heavily on short-term deposits expects interest rates to consistently decrease over time, it would allocate most of its loans with ______ rates if it desires to maximize its expected returns. It could reduce its exposure to interest rate risk by setting ______ rates on its loans. A) fixed; fixed B) variable; fixed C) variable; variable D) fixed; variable

D

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's net interest margin is ________ percent. A) 4.0 B) 3.6 C) 6.7 D) 5.0

D

Which of the following loan portfolios are best diversified against default risk? A) consumer loans to farmers and commercial loans to farm equipment dealers in a local area B) commercial loans to the same industry C) commercial loans to various retail stores in the same city D) consumer and commercial loans to different industries in different cities

D

Which banking act allowed for the creation of NOW accounts? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain Act

DIDMCA

Which banking act removed deposit rate ceilings? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain A

DIDMCA

____ are offered to bank customers who desire to write checks against their account. a. Time deposit accounts b. CDs c. Demand deposit accounts d. Money market deposit accounts

Demand deposit accounts

All other things equal, when banks issue new stock, they a. increase reported earnings per share. b. decrease their ability to absorb operating losses. c. dilute the ownership of the bank. d. A and B

Dilute the ownership of the bank

A ____ loan may be especially appropriate when the bank wishes to avoid adding more debt to its balance sheet. a. term b. bullet c. direct lease d. revolving credit

Direct lease

Banks can resolve cash deficiencies by A) creating additional liabilities. B) selling assets. C) buying back common stock. D) increasing dividend payouts. E) A or B

E

During a period of _______________ interest rates, a bank's net interest margin will likely ___________ if its liabilities are more rate sensitive than its assets. A) decreasing; decrease B) increasing; increase C) decreasing; increase D) increasing; decrease E) answers c and d are correct

E

If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's A) default risk would decrease. B) default risk would increase. C) liquidity risk would increase. D) liquidity risk would decrease. E) B and C

E

Which of the following is a measure for banks to assess their exposure to interest rate risk? A) capital ratio B) leverage measure C) duration measurement D) gap ratio E) C and D

E

The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on a. economies of scale. b. financial leverage. c. diseconomies of scale. d. capital adequacy theory.

Economies of scale

All Fed member banks must hold a. private insurance on deposits. b. FDIC insurance on deposits. c. both FDIC and private insurance on deposits. d. none of the above

FDIC insurance on deposits

Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds? a. MMDAs b. federal funds c. the discount window d. retail CDs

Federal Funds

Which of the following statements is incorrect with respect to the federal funds market? a. It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions. b. Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them. c. The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed. d. All of the above are true with respect to the federal funds market.

Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them.

Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when? a. working capital loan b. direct lease loan c. term loan d. informal line of credit

Informal line of credit

Obtaining funds through ____ is not a common source of funds for banks to satisfy a temporary deficiency of funds? a. issuing bonds b. the federal funds market c. repurchase agreements d. borrowing from the Federal Reserve

Issuing Bonds

Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999? a. It complemented the Glass-Steagall Act. b. It enabled commercial banks to more easily pursue securities and insurance activities. c. It gave securities firms and insurance companies the right to acquire banks. d. The Act requires that commercial banks must have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities. e. All of the above are true.

It completed the Glass-Steagall Act

Which of the following is not an off-balance sheet activity for commercial banks? a. consumer loans b. loan commitments c. standby letters of credit d. swap contracts e. All of the above are off-balance sheet activities.

Loan commitments

The main use of bank funds is for a. loans. b. investment securities. c. fixed assets. d. repurchase agreements.

Loans

____ do not specify a maturity and provide limited check-writing ability (they allow only a limited number of transactions per month). a. Money market deposit accounts (MMDAs) b. Negotiable CDs (NCDs) c. Retail CDs d. Callable CDs e. Negotiable order of withdrawal (NOW) accounts

MMDAs

Transaction deposits do not include a. demand deposits. b. NCDs. c. NOW accounts. d. all of the above are transactions deposits

NCDs

When a bank obtains funds through ____, households are not a common provider of the funds. a. NOW accounts b. retail CDs c. passbook savings accounts d. NCDs

NCDs

A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, minimum deposit of $100,000 or more, and a secondary market. a. retail CD b. negotiable CD c. market CD d. protective CD

Negotiable cd

A(n) ____ account provides checking services as well as interest. a. demand deposit b. negotiable order of withdrawal (NOW) c. passbook savings d. time deposit

Negotiable order of withdrawal (NOW)

A ____ is a type of loan commitment. a. standby letter of credit (SLC) b. note issuance facility (NIF) c. forward contract d. swap contract e. none of the above

Note issuance facility (NIF)

Money market deposit accounts differ from conventional time deposits in that they a. specify a maturity. b. offer limited check writing privileges. c. are less liquid. d. none of the above

Offer limited check writing privileges

When banks obtain funds in the federal funds market, the providers of the funds are a. other depository institutions. b. nonfinancial corporations. c. consumers. d. the Federal Reserve.

Other depository institutions

The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the a. federal funds rate. b. primary credit lending rate. c. repo rate. d. none of the above

Primary credit lending rate

The interest rate banks charge their most creditworthy customers is known as the a. federal funds rate. b. primary credit lending rate. c. prime rate. d. call money rate

Prime rate

Which banking act allowed interstate banking? a. Reigle-Neal Interstate Banking and Branching Efficiency Act b. Glass-Steagall Act c. DIDMCA d. Sarbanes-Oxley Act

Reigle-Neal interstate banking and branching efficiency act

When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a a. federal funds loan. b. discount window loan. c. repurchase agreement. d. commercial paper transaction.

Repurchase agreement

When a bank obtains funds through a ____, the provider of the funds receives collateral. a. retail CD b. NOW account c. repurchase agreement d. money market deposit account

Repurchase agreement

The Federal Reserve provides loans to banks in order to a. resolve permanent shortages of funds experienced by banks. b. resolve temporary shortages of funds experienced by banks. c. finance the shortages of funds of finance companies. d. none of the above

Resolve temporary shortages of funds experienced by banks

Which of the following accounts does not allow checks (at least a limited amount) to be written? a. NOW accounts b. money market deposit accounts (MMDAs) c. retail CDs d. all of the above allow checks to be written

Retail CDs

As a source of funds, small banks rely more heavily on ____, and larger banks rely more heavily on ____. a. time deposits and foreign deposits; savings deposits and short-term borrowings b. savings deposits and short-term borrowings; foreign deposits and time deposits c. savings and time deposits; foreign deposits and short-term borrowings d. foreign deposits and short-term borrowings; savings and time deposits

Savings and time deposits; foreign deposits and short term borrowings

____ are the largest bank source of funds as a percentage of total liabilities. a. Small-denomination time deposits b. Money market deposit accounts (MMDAs) c. Transaction deposits d. Borrowed funds e. Savings deposits (including MMDAs)

Savings deposits (including MMDAs)

Subordinated notes and debentures are examples of a. primary capital. b. secondary capital. c. depository sources of funds. d. repurchase agreements.

Secondary capital

____ loans are primarily used to finance the purchase of fixed assets. a. Term b. Working capital c. Informal line of credit d. Revolving credit

Term

The primary credit lending rate is determined by a. the Federal Reserve. b. Congress. c. the Treasury. d. the President of the United States.

The federal reserve

Which of the following is true? a. The primary credit lending rate is set by the president of the United States. b. The federal funds rate is set by the president of the United States. c. The primary credit lending rate is set by commercial banks. d. The primary credit lending rate is now set at a level above the federal funds rate. e. A and B

The primary credit lending rate is now set at a level above the federal funds rate

Bank loans designed to support a firm's ongoing business operations are called a. term loans. b. working capital loans. c. direct lease loans. d. revolving credit loans.

Working capital loans

Bank regulations typically: a. involve a tradeoff between the safety of the banking system and the efficiency of bank operations. b. impose restrictions on the types of assets in which banks can invest. c. set requirements for the minimum amount of capital that banks must hold. d. all of the above

all of the above

Which of the following is not a corrective action taken by regulators when a bank is identified as a problem bank? a. Regulators may examine such banks frequently and thoroughly. b. Regulators may request that a bank boost its capital level or delay its plans to expand. c. Regulators can require that additional financial information be periodically updated to allow continued monitoring. d. Regulators have the authority to take legal action against a problem bank if the bank does not comply with their suggested remedies. e. All of the above are possible corrective actions taken by bank regulators.

all of the above

Which of the following is not a main deregulatory provision of Depository Institutions Deregulation and Monetary Control Act of 1980? a. phase-out of deposit rate ceilings b. allowance of checkable deposits for all depository institutions c. new lending flexibility of depository institutions d. allowance of interstate banking for depository institutions in most states

allowance of interstate banking for depository institutions in most states

The Financial Services Modernization Act of 1999 a. gave banks and other financial service firms less freedom to merge. b. allowed financial institutions to offer a diversified set of financial services without being subjected to stringent constraints. c. offers very few benefits to a financial institution's clients. d. increased the reliance of financial institutions on the demand for the single service they offer.

allowed financial institutions to offer a diversified set of financial services without being subject to stringent constraints

The Glass-Steagall Act of 1933 prevented a. any firm that accepts deposits from underwriting stocks and bonds of corporations. b. any firm that accepts deposits from underwriting general obligation bonds of states and municipalities. c. any firm that accepts deposits from holding any corporate bonds in its asset portfolio. d. state-chartered banks from offering commercial loans.

any firm that accepts deposits from underwriting stocks and bonds of corporations

Commercial banks ____ restricted to a maximum percentage of their capital to loan to a single customer, and ____ allowed to use borrowed or deposited funds to purchase common stock. a. are; are b. are; are not c. are not; are d. are not; are not

are; are not

____ is (are) not a major source of funds for commercial banks. a. Deposit accounts b. Borrowed funds c. Commercial loans d. Bank capital e. All of the above are commercial banks sources of funds.

commercial loans

A federal bank charter is issued by the a. Comptroller of the Currency. b. Securities and Exchange Commission. c. U.S. Treasury. d. Federal Reserve. e. none of the above

comptroller of the currency

The intent of federal funds transactions is to a. correct short-term fund imbalances experienced by banks. b. correct long-term fund imbalances experienced by banks. c. serve as a permanent source of bank capital. d. serve as the primary depository source of funds.

correct short-term fund imbalances experienced by banks

Before the credit crisis, _________ were heavily used to protect against the credit (default) risk from investing in mortgage-backed securities. a. standby letters of credit b. interest rate swap contracts c. credit default swap contracts d. forward contracts on mortgage

credit default swap contracts

____ is not a characteristics used by the Federal Deposit Insurance Corporation (FDIC) to rate banks. a. Capital adequacy b. Current stock price c. Asset quality d. Management e. All of the above are used by the FDIC to rate banks.

current stock price

The liquidity component of the CAMELS rating refers to a. regulators' concern about how a bank's earnings would change if economic conditions change. b. how well the bank's management would detect its own financial problems. c. a bank's sensitivity to financial market conditions. d. monitoring the type of loans that are given, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases. e. excessive borrowing by banks from outside sources, such as the discount window.

excessive borrowing by banks from outside sources, such as the discount window

The key reason for regulatory examinations (such as CAMELS ratings) is to a. rate past performance. b. detect problems of a bank in time to correct them. c. check for embezzlement. d. monitor reserve requirements.

detect problems of a bank in time to correct them

Which of the following is not a specific criterion the FDIC uses to monitor banks? a. capital adequacy b. dollar value of fixed assets c. asset quality d. earnings e. sensitivity to financial market conditions

dollar value of fixed assets

Generally, the failure of small banks a. causes more widespread concern about the safety of the banking system than the failure of large banks. b. causes equal concern about the safety of the banking system as the failure of large banks. c. causes less concern about the safety of the banking system than the failure of large banks. d. Either A or B can be true, depending on the type of business cycle that exists while the failures occur.

causes less concern about the safety of the banking system rather than the failure of large banks.

In a standby letter of credit, a bank agrees to: a. charge a fixed interest rate for a line of credit for a specified period. b. back a customer's obligation to a third party. c. provide a customer with funds up to a specified maximum amount over a specified period. d. service credit card loans originated by another bank.

back a customers obligation to a third party

The Garn-St. Germain Act of 1982 a. permitted depository institutions to offer money market deposit accounts. b. prevented depository institutions from acquiring problem institutions across geographical boundaries. c. required the Fed to explicitly charge depository institutions for its services. d. allowed the Fed to provide check clearing to depository institutions at no charge.

permitted depository instututions to offer money market deposit accounts

The Financial Reform Act was intended to: a. prevent another credit crisis. b. reduce capital ratios. c. impose interest rate ceilings on deposits. d. prevent banks from offering securities services.

prevent another financial crisis

For any given bank, federal funds ____ represent a(n) ____. a. purchased; asset b. sold; liability c. purchased; liability d. A and B

purchased; liability

The opening of a commercial bank in the United States a. does not require a charter. b. always requires a charter from a state government. c. always requires a charter from the federal government. d. requires a charter from a state or the federal government. e. requires a charter from both the state and federal government.

requires a charter from a state or the federal government.

The uniform global capital requirements mandated a minimum level of Tier 1 capital, which primarily consists of funds obtained from a. issuing commercial paper and bonds. b. retaining earnings and issuing commercial paper. c. retaining earnings and issuing common stock. d. issuing bonds and common stock.

retained earnings and issuing common stock

he Basel framework recommends capital requirements in proportion to: a. mortgages b. commercial paper c. liabilities d. risk-weighted assets

risk-weighted assets

____ are the largest bank source of funds (as a percentage of total liabilities). a. Small-denomination time deposits b. Large-denomination time deposits c. Transaction deposits d. Savings deposits (including MMDAs)

savings deposits (including MMDAs)

A bank can increase its capital ratio by: a. buying back shares of its stock from shareholders. b. selling assets. c. increasing its dividend to encourage more investors to purchase its stock. d. increasing its off-balance sheet activities.

selling assets

The moral hazard problem is minimized when deposit insurance premiums are a. zero (not imposed by the FDIC). b. the same percentage of assets for all banks. c. set at a fixed percentage of assets for large banks, and is zero for small banks. d. set at a percentage of assets that is based on the bank's risk level.

set at a percentage of assets that is based on the bank's risk level.

The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010: a. ended the system of risk-based insurance premiums. b. set requirements for the Deposit Insurance Fund's reserves. c. raised the limit for insured deposits to $750,000 per depositor. d. allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.

set requirements for the deposit insurance fund's reserve

The Volcker rule, named for a former Fed chair: a. is intended to increase the powers of the Fed. b. states that the U.S. government will rescue certain large banks if necessary to reduce systemic risk in the financial system. c. sets limits on banks' proprietary trading. d. requires all banks to undergo annual stress tests.

sets limits on banks proprietary trading

n "off-balance-sheet commitment" that provides the bank's guarantee on the financial obligations of a borrower to a specific party is a a. standby letter of credit. b. federal funds agreement. c. repurchase agreement. d. discount window agreement.

standby letter of credit

The potential risk that financial problems can spread through financial institutions and the financial system is referred to as: a. systemic b. systematic c. unsystematic d. market

systemic

____ loans are extended primarily to finance the purchase of fixed assets such as machinery. a. Term b. Working capital c. Federal fund d. Direct lease

term

National banks are regulated by ____, and state banks are regulated by ____. a. the Comptroller of the Currency; their state agency b. the Comptroller of the Currency; the Comptroller of the Currency c. their state agency; their state agency d. their state agency; the Comptroller of the Currency

the comptroller of the currency; their state agency

The interest rate charged on loans between depository institutions is commonly referred to as the a. federal funds rate. b. discount rate. c. primary credit lending rate. d. none of the above

federal funds rate

The Basel Accord a. forces banks with greater risk to maintain more deposits. b. forces banks with greater risk to maintain more capital. c. forces banks with greater risk to maintain less capital. d. none of the above

forces banks with greater risk to maintain more capital

Which of the following is an "off-balance-sheet commitment?" a. long-term debt b. additional paid-in capital c. notes payable d. guarantees backing commercial paper issued by firm

guarantees backing commercial paper issued by firm

Which of the following is not an off-balance sheet activity? a. highly leveraged transactions (HLTs) b. standby letters of credit c. forward contracts d. swap contracts

highly leveraged transactions (HLTs)

Which of the following statements is incorrect? a. The validity of a bank's estimated VAR is assessed with backtests in which the actual daily trading gains or losses are compared to the estimated VAR over a particular period. b. Some banks supplement the VAR estimate with stress tests. c. In general, the VAR model does not lend itself to determine capital requirements. d. All of the statements above are correct.

in general, the VAR model does not lend itself to determine capital requirements

The Basel III framework proposes: a. lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis. b. relying on the rating agencies to assess the risk of bank assets. c. increased capital requirements and liquidity requirements for banks. d. using the gap ratio to set the capital ratio.

increased capital requirements and liquidity requirements for banks

The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own a. reserve requirements. b. capital ratios. c. interest rates on savings deposits. d. corporate loan interest rates.

interest rates on savings deposits

forward contract on currency: a. is a way to hedge credit (default) risk. b. is used to to swap fixed interest payments in euros for variable interest payments in dollars. c. is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate. d. is an agreement between a customer and a bank to exchange one currency for another on a specified date at whatever the exchange rate is on that day.

is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate

Bank capital represents funds obtained through ____ and through ____. a. issuing stock; offering long-term CDs b. issuing repurchase agreements; issuing bonds c. issuing stock; retaining earnings d. offering long-term CDs; issuing bonds

issuing stock, retained earnings

A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____. a. just a few days; one year or more b. several weeks; one year or more c. several weeks; just a few days d. just a few days; just a few days

just a few days; just a few days

Commercial banks that are not members of the Federal Reserve System ____ borrow from the Fed, and ____ subject to the Fed's reserve requirements. a. may; are b. may; are not c. may not; are not d. may not; are

may; are

From a bank manager's perspective, the differential in interest between a bank's loans and its deposits; a. must not exceed the federal funds rate. b. is called the primary credit lending rate. c. must be sufficient to cover the bank's other expenses and generate a reasonable profit for the bank's owners. d. must be sufficient to cover the bank's deposit insurance premiums and its reserve requirements at the Federal Reserve.

must be sufficient to cover the banks other expenses and generate a reasonable profit for the banks owners

____ is not a rating criterion used by the FDIC. a. Capital adequacy b. Off-balance sheet financing c. Asset quality d. Management e. Liquidity

off balance sheet financing

____ is not a rating criterion used by the Federal Deposit Insurance Corporation (FDIC). a. Capital adequacy b. Off-balance sheet financing c. Asset quality d. Management e. Liquidity

off balance sheet financing

Banks sometimes prefer to minimize their amount of capital since a. interest payments must be paid by the bank on all capital that is held. b. they try to avoid diluting ownership of the bank. c. A and B d. none of the above

they try to avoid diluting ownership of the bank

During the 2008-2010 period, the ____ was implemented to alleviate the financial problems experienced by banks and other financial institutions with excessive exposure to mortgages or mortgage-backed securities. a. Riegle Program b. Sarbanes-Oxley Program c. FDIC Program d. Troubled Asset Relief Program (TARP)

troubled asset relief program (TARP)

When a bank engages in proprietary trading, it: a. uses its own funds to make investments. b. is not subject to regulations. c. lends the funds in the federal funds market. d. normally uses the funds to build its capital.

uses its own funds to make investments

Federal deposit insurance a. existed since the 1800s. b. was created in 1933. c. was created after World War II. d. was created in 1960.

was created in 1933

During the credit crisis, all of the following occurred except: a. some securities firms were allowed to become bank holding companies. b. the Federal Reserve rescued American International Group, an insurance company. c. the Treasury injected funds into financial institutions. d. the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.

the supreme court ruled that the federal reserve had exceeded its authority by assisting bear stearns because Bear was a securities firm and not a commercial bank

Before establishing foreign branches, a U.S. bank must obtain the approval of the: a. U.S. Treasury. b. U.S. Commerce Department. c. Federal Deposit Insurance Corporation. d. Federal Reserve.

Federal reserve

Which banking act permanently increased FDIC insurance up to $250,000? a. DIDMCA b. Sarbanes-Oxley Act c. Financial Reform Act d. Garn-St. Germain Act

Financial reform act

Which banking act allowed banks to cross state lines in order to acquire a failing institution? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain Act

Garn-St. Germain act

The federal funds rate is typically ____ the primary credit lending rate. a. greater than b. less than c. equal to d. none of the above

Greater than

Cash held ____ represents the major portion of a bank's required reserves. a. at other commercial banks b. in a bank's vault c. on deposit at the federal funds window d. on deposit with the Board of Governors

In a banks vault

Which of the following is not true regarding the Financial Services Modernization Act of 1999? a. It provided more momentum for the consolidation of financial services. b. Financial institutions were finally able to offer a diversified set of financial services without being subjected to stringent constraints on the form or amount of financial services that they could offer. c. Banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services that they acquired. d. Financial institutions no longer had to search for loopholes or monitor their business to ensure that the degree of financial services offered remained within the regulatory constraints that were previously imposed. e. all of the above are true

banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services they required.

The fee banks pay to the FDIC for deposit insurance is now a. a fixed dollar amount for all banks. b. a fixed percentage of the bank's deposit level for all banks. c. a fixed percentage of the bank's loan volume for all banks. d. based on the risk of the bank.

based on the risk of the bank